Valuation in the LVR ratio for off the plan purchase

Off the plan property purchases (often apartments) are quite common these days in Sydney and similar markets. Ordinarily one would sign the purchase agreement now and completion/settlement can be 1, 2 or 3 years away.

If on settlement the property value has increased above the purchase price, and this is confirmed by the bank's valuer, how does the lender calculate the "V" in the LVR ratio? Is this the purchase price according to the purchase contract, or the valuation upon site valuation by the valuer?

If it is the latter, is it then possible to borrow 100% of the purchase price, and yet satisfy the 80% LVR requirement if the value on valuation date is higher than purchase price?

 

It is the valuation on-site by the valuer.
Example - You buy OTP for 400k, you put down a deposit of say 10% = 40k
If the value doesn't change then come settlement you need to come up with the other 10% (assuming no LMI) and closing costs say 20k. So you would need to fund the 60k to settle.

If however the valuer says, well played and values it at 500k then they will still lend you 80% (given you can service), meaning a loan of 400k and the increased value has covered the extra 40k you needed. You then only need to come up with the 20k stamp duty. If it was valued higher again then you could also cover that.

BUT BUT BUT BUT

What happens if the valuer says "Not well played, I think its only worth 300k".
They will now only lend you 240k (again assuming no LMI but in this instance you would need to borrow as much as you could) meaning you now have to come up with 120k for the remaining deposit plus 20k for the stamps.
You are now in big trouble of losing your deposit if you cannot cover the shortfall AND potential to be sued.

Buying OTP IMO is a disaster waiting to happen, ESPECIALLY in a market that has peaked like Sydney.

 

If the contract has been in place for more than 12 months, then plenty of lenders will base of current market value.
That is the LVR is calculated by: LOAN AMOUNT / VALUATION AMOUNT.
So if your property has increased in value substantially, then yes, you can borrow more than 100% of the purchase price.
ANZ do allow this for 6 months+ contracts.
NAB, AMP, St George, etc - allow this so long as contract has been in place over 12 months.

 

On the flip side, 1000s of people have made 6 figures +, by putting relatively minimal funds down (20-40k) in the last few years. Plenty of FHB who took a bit of risk and are being paid handsome dividends.

I do a lot of OTP type transactions for settlements in Sydney - lots are getting significant chunks of money back at settlement. Their deposit back and then some. Also do quite a fair bit in Brisbane - plenty are having to tip large chunks of money in with relatively significant shortfalls!

In saying that, i think OTP vals have come off 5-10% since the turn of the year in Sydney markets. Valuers likely being a bit more conservative.

I completely agree about the current statement - pretty big risk buying it at todays prices for 2-3 years down the track with plenty of supply coming online. Also probably best not to gamble on it - its high risk if your gambling on OTP valuation rises to fund property purchases.

 

Thank all. There were some conflicting messages, even from mortgage brokers (not in this forum) so it was good to hear from the experts here. Surprisingly some mortgage brokers say that no bank will lend above the lower of purchase price and valuation.

 

That's true of just a straight sale of established property with a standard 6 or so week settlement.

 

Not true at all.

Had one come back $50k higher - ANZ lend against the val and client avoiding mortgage insurance

I've done this a few times recently.

Cheers

Jamie

 

This happens in other professions as well. But with the forum, if you are given the wrong information then someone will call it out and provide the right information.

 

@Redom no doubt you can do well.
You can also do well playing roulette. 2-3 year outlook OTP IMO is akin to choosing red or black.

For every success story I'm sure there is a disaster story. Only difference being with success you avoid LMI, with failure your life is crushed.

My point. Why buy OTP with so many better ways to invest. Just my 2 cents.

 

agree with you @albanga, the risks and the small probability of success in almost all circumstances outweigh the significant risks IMO too (finance and vals!)